Airline Strategy
P erhaps one of the most far-reaching developments of the past 20 years has to do with the rise of emerging econo- mies, which once represented no more than 15 percent of the global economy and now have come to account for nearly half of all eco- nomic activity. These economies are growing fast and are located around the world, in Africa, South and East Asia, Latin America and the Middle East.
Some have become major exporters of manufac- tured goods, while others sell agricultural, energy or mineral commodities. Emerging countries have also become ma- jor sources of foreign direct investment (FDI) – that is, companies based in emerging econo- mies have expanded throughout the world, making acquisitions and setting up manufac- turing and distribution operations, not just in other emerging economies and developing countries, but in developed ones as well.
Overall, emerging market multinational companies (MNCs) are still few and far be- tween. As of the end of 2009, they accounted for around 14 percent of all cumulative FDI in the world, up from 7 percent in 1990. However, the rate at which they are catching up is very fast: In 2009, they generated around a quarter of all new FDI in the world, a proportion that is predicted to surpass 50 percent within a few years. The list of leading MNCs from emerging economies is considerable. Argentina’s Arcor is the largest candy company in the world, and Tenaris is the largest maker of seamless steel By MAURO F. GUILLÉN and ESTEBAN GARCÍA-CANAL The Rise of Emerging Market Multinationals GROWING BY LEAPS AND BOUNDS Deep insight iese insight 13 issue 10 third Q u A rter 2011 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIES The proliferation of multi- national companies from emerging countries has taken observers, policy makers and scholars by surprise. t h e authors’ research on these up-and-coming MNCs reveals several crucial features that distinguish them from their developed country counter - parts, namely related to their speed of internationalization, competitive (dis)advantages, political capabilities, expan - sion path, preferred entry mode and organizational adaptability.
e x ploring these factors reveals some of the advantages they enjoy, and how they have at times sub - verted conventional theories of growth. Managers of traditional, established MNCs can learn from their example by adopt - ing more network-based structures and innovative or - ganizational forms. th ey also have to think about sources of competitive strength other than technology and brands, especially in the areas of execution and political skills – because the new breed of MNC is fast reshaping global competition. executive summary tubes. Mexico’s Bimbo is the largest bakery.
Brazil’s JBS is the biggest meat company, while Embraer is the largest regional jet and execu- tive jet manufacturer. South Korea’s Samsung is the largest consumer electronics firm. China’s BYD is the leading manufacturer of nickel-cad- mium batteries. And the list goes on. Over the next few years, several emerging market firms are poised to become No. 1 in their respective industries: Cemex, from Mexico, in cement; Acer, from Taiwan, in personal com - puters; TCS and Wipro, from India, in IT ser - vices and outsourcing; Vale, from Brazil, in min- ing; and Sinovel, from China, in wind turbines, among others. Within two decades, we predict that emerg- ing market MNCs will account for half of the world’s largest 500 firms, up from 106 at the present time. There are two important reasons for this trend. First, emerging economies’ higher growth rates see them amassing large trade surpluses, which encourages asset acquisition in foreign countries. Second, emerging economies are develop- ing robust internal consumption markets, mak - ing local firms bigger and savvier at marketing themselves on a global scale. This virtuous circle will contribute to mak - ing the global economy more multipolar, more competitive and certainly more diverse in re- lation to the home countries of other major MNCs operating in the world today.
It’s also worth noting that emerging market MNCs were born in a peculiar context – one that has conditioned their development. Their markets for labor, capital, intermediate goods, and final goods and services are incomplete or imperfect. There is some policy uncertainty, and their dispute resolution systems and le- gal frameworks are quite unpredictable. Their governments tend to intervene heavily in the economy, and in some industries there is con- siderable political interference as well. Such characteristics are reflected in the structure and behavior of these MNCs, as we will explore in this article. This article is based on extensive research we have conducted on MNCs in Asia, North and Latin America, the Middle East and West - ern Europe, including our examination of the international expansion of Spanish firms over the past 25 years, which formed the basis of our recent book, The New Multinationals: Spanish Firms in a Global Context. We’ve observed that a new breed of MNC is reshaping competition in global industries. Let’s examine the reasons behind this phenomenon. Waves of expansion The modern MNC has its origins in the second Industrial Revolution of the late 19th century, which launched such technology-intensive in- dustries as chemicals, plastics, specialty metals and automobiles. These were capital-intensive sectors in which knowledge and brand repu- tation played an increasingly important role.
North American, British and continental Euro- pean firms expanded around the world on the basis of intangible assets such as technology, brands and managerial expertise. During the 1920s, consumer goods indus- tries such as food processing, tobacco, beverag- es and personal care items also developed and spawned a large number of MNCs. The climax of the worldwide expansion of European and North American MNCs was reached during the 1950s and ’60s, as trade and investment barriers gradually fell around the world. While there were significant variations in terms of strategy and structure among North American, European and Japanese MNCs, firms expanding from richer and technologically ad- vanced countries tended to share a core set of iese insight 14 third Q uA rter 2011 issue 10 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIES features. Chief among them were their techno- logical, marketing and managerial strengths, which enabled them to overcome the so-called “liability of foreignness” in a variety of markets.
For the most part, they invested in wholly or majority owned subsidiaries. They transferred technology, products and knowledge from headquarters to far-flung operations around the globe, relying on elaborate bureaucratic and financial controls. This state of affairs was prevalent until the 1990s, and essentially meant that North American, European and Japanese firms came to dominate global industries. Beginning in the 1990s, new sets of compa- nies started to make headlines for their global expansion. They included manufacturing firms from Taiwan and South Korea, and infrastruc- ture and financial services companies from Por - tugal and Spain. Within a few years, companies from Brazil, Chile, China, Egypt, India, Indo - nesia, Mexico, Nigeria, Thailand, Turkey, the United Arab Emirates and Venezuela, among others, had joined this trend. These new MNCs operate internationally using multiple modes ranging from alliances and joint ventures to wholly owned subsid- iaries. Some of them are small and product focused, while others are large and diversified across many industries. Research on the phenomenon has referred to them in a variety of ways, including “Third World multinationals,” “latecomer firms,” “un- conventional multinationals,” “challengers” or “emerging multinationals.” While they may not possess the most so- phisticated technological or marketing skills in their respective industries, they have ex- panded around the world in innovative ways.
They have become key actors in FDI and cross-border acquisitions. The proliferation of the new MNCs has taken observers, policy makers and scholars by surprise. Just a decade ago, many of these firms were marginal competitors; today they are chal- lenging some of the world’s most accomplished and established MNCs in a wide variety of in - dustries and markets. The unexpected rise of emerging market MNCs begs three fundamental questions. First, do these firms share some common features that distinguish them from the tra- ditional, largely North American model of the multinational firm? Second, what advantages have made it pos - sible for them to operate and compete, not only in host countries at the same or lower level of economic development, but also in the richest economies? Third, how have they been able to expand abroad at such dizzying speed, in defiance of the conventional wisdom about the virtues of a staged, incremental approach to interna- tional expansion? six Distinguishing Features Emerging market MNCs owe their remarkable rise to a combination of two key factors: imita- tion of established MNCs, which they have em- ulated strategically and organizationally; and innovation, in response to the peculiar charac- teristics of emerging and developing countries. This latter factor is extremely relevant.
Emerging market MNCs originate from coun- tries with institutional environments that are, by definition, less defined and weaker than more developed contexts. This imposes some additional challenges and constraints, requir - ing that they come up with more imaginative solutions to tackle them. It also frees them from some of the stricter legal regimes concerning property rights, for example, which might hold others back from growing quite so fast. Our research on emerging market MNCs has revealed several crucial features that dis- tinguish them from their predecessors and con- temporary counterparts (Exhibit 1 provides a summary). Exploring these reveals some of the Emerging market MNCs owe their remarkable rise to a combination of two key factors: imitation of established MNCs; and innovation, in response to their peculiar characteristics. iese insight 15 issue 10 third Q u A rter 2011 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIES rent international business environment.
2. COMPETITIVE (DIS)ADVANTAGES. A second dis- tinguishing feature of emerging market MNCs is that they all, without exception, have had to deal with the liability of being latecomers, and the competitive disadvantage that this invari- ably entails. Established MNCs from the most advanced countries generally have the resources and capabilities they desire in-house, whereas emerging market MNCs must work harder to ob- tain and upgrade their resources and capabilities.
Constantly having to play catch-up and close the gap with their developed country counterparts subsequently conditions their approach to in- ternational expansion. 3. POLITICAL CAPABILITIES. Having said that, al- though their marketing and technological skills and resources may be weaker, emerging market MNCs tend to possess much stronger political capabilities, giving them a decided advantage over better endowed MNCs. Emerging market MNCs have learned how to deal with discretion- ary and unstable governments in their home countries. They know how to operate in heav - ily regulated environments, long before they were deregulated. This makes them better pre- pared than traditional MNCs to succeed in for - eign countries characterized by weak or rapidly changing institutional environments. Considering the high growth rates and pe- culiar institutional environments of these fast- evolving countries, political capabilities have proved especially valuable, not only for navigat - ing these tricky environments, but when mov- ing into advanced economies as well. Having mastered the emerging market environment, making the leap to the more stable and straight - forward business environments of Europe and North America can feel much less traumatic than going in the opposite direction. Conse- quently, they have quickly managed to boost their presence in a variety of infrastructure industries, ranging from water and electricity generation and distribution, to telecommuni - cations and the operation of airports, ports and toll highways. 4. EXPANSION PATH. These features, taken to- gether, point to another key characteristic of emerging market MNCs. As they expand, they run up against a significant dilemma: balancing Mauro F. Guillén is the director of the Joseph h. Lauder in stitute at Penn.
h e holds the dr . Felix Zandman e n dowed Professorship in i n ternational Management at the Wharton sc hool and a secondary appointment as professor of sociology at the u n iversity of Pennsylvania.
h e also serves on the World ec onomic Forum’s Global Agenda Council on em erging Multinationals.
h e received a Ph. d. in sociology from Yale u n iversity and a doctorate in political economy from the u n iversity of Oviedo in his native sp ain. Esteban García-Canal is a professor of organizational management at the u n iversity of Oviedo.
h i s research interests include strategic alliances, organizational design, international strategy, as well as emerging market MNCs. hi s work has appeared in the Strategic Management Journal, Academy of Management Perspectives, Research Policy, Journal of Institutional and Theoretical Economics and Harvard Business Review, among others.
h e recently coauthored The New Multinationals with Mauro F. Guillén. about the authors advantages they enjoy, and how they have sub- verted conventional theories of growth.
1. SPEED OF INTERNATIONALIZATION. Twenty years ago, companies such as Vale, Cemex and Lenovo were mostly domestic firms; nowadays, they op- erate in dozens of countries, and are among the Top 3 firms in their respective industries of min- ing, cement and personal computers. This reflects the first way in which emerg- ing market MNCs are distinctive: the speed at which they have internationalized. The pace at which they are closing the gap with their most advanced counterparts from North America, Europe and Japan is accelerating. It’s no coincidence that this is happening during a time of intense market globalization.
Although local differences still matter, achiev- ing global reach and global scale have become more important than ever, and emerging mar - ket MNCs know this better than most. Once they’ve achieved a certain degree of success at home, the main way for them to go to the next level, in terms of expanding their capa- bilities and market reach, is to go global – prefer - ably sooner rather than later. Ironically, the meager international pres- ence they’ve had up until recently has actually worked in their favor, allowing them to adopt strategies and organizational structures that now happen to be most appropriate to the cur - iese insight 16 third Q uA rter 2011 issue 10 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIES their desire for global reach with the previously mentioned need to upgrade their capabilities as they evolve. Some may prioritize acquiring global market reach over upgrading their capabilities, as Hyundai did in its early expansion. Others may choose to take the opposite approach, as in the case of Tata Motors. Few manage to do both at the same time. This tension – between gaining global reach versus upgrading capabilities – forces many emerging market MNCs to enter developed and developing countries simultaneously right at the beginning of their international expan - sion efforts. As their homegrown competitive advan- tages can be readily applied to other emerging or developing countries, they expand there naturally. This helps them to grow in size, gain operational experience and generate profits. Venturing into more developed countries, meanwhile, exposes them to cutting-edge mar - ket demand, which pushes them to upgrade or develop their capabilities further. As such, they concentrate on where they can best achieve strategic assets, limiting their presence in de- veloped countries to a few locations where they already have a partner or where they have ac - quired a local firm. This serves as a useful learn- ing experience for them, and as they catch up to established MNCs, they can shift more invest - ment to these countries. 5. PREFERRED ENTRY MODE. A further feature of emerging market MNCs is their preference for entry modes based on external growth. They use global alliances and acquisitions to overcome the “liability of foreignness” in the partner or target country, as well as gain access to those countries’ EMERGING MARKET MNCs DIFFER IN SEVERAL CRUCIAL WAYS FROM THEIR PREDECESSORS.
The Keys to Their Climb exhibit 1 Speed of Internationalization Competitive Advantages 1 2 Political Capabilities 3 Expansion Path 4 Preferred Entry Mode 5 Organizational Adaptability 6 n h igh, because of their recent and r elatively limited international presence, which enables them to adapt technologies to small-scale markets, excel at project execution and adopt new technology quickly n external growth: alliances, joint v entures, acquisitions n Low, because of their ingrained structures and cultures n internal growth: wholly owned subsidiaries n d ual path: simultaneous entry into de veloped and developing countries n into less developed countries as home c ountry development raises production costs n into more developed countries n single path: from less to more distant c ountries n strong: firms are used to unstable political en vironments n Weak: firms are used to stable political environments n Weak: upgrading of resources required n strong: required resources a vailable in-house n Accelerated n Gradual i n search of markets n into similarly developed countries n into less developed countries i n search of strategic assets i n search of lower costs EMERGING MARKET MNCs T RADITIONAL MNCs F EAT u RE iese insight 17 issue 10 third Q u A rter 2011 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIES competitive advantages, with the aim of upgrad- ing their own resources and capabilities. Some emerging market MNCs, like Acer, built their early expansion on a network of al- liances and joint ventures with a different local partner in nearly 20 different markets. Other emerging market MNCs used their home mar - ket position to ease the entry of global partners in exchange for equal access to the partners’ home markets and technology, as in the case of Lenovo and IBM. Besides the size of the domestic market, the stronger the position of emerging market MNCs in it, the greater the bargaining power of the firm to enter into these alliances. China’s Haier, Mexico’s Mabe and Turkey’s Arçelik in the domestic appliances market illustrate this point. Their international expansion was boosted by alliances with world leaders, which allowed them to upgrade their technological competences. In the case of some Chinese firms, their privileged access to financial re- sources – because of government subsidies or funding constraints in capital markets, for ex- ample – facilitated certain acquisitions, which, in turn, led to capability upgrading processes.
6. ORGANIZATIONAL ADAPTABILITY. Firms need to be able to implement organizational inno- vations to adapt to the requirements of glo- balization. The final feature of emerging mar - ket MNCs is that they enjoy more freedom in this regard, because they do not face the con- straints typical of established MNCs. Many of the major global players with long business track records from the devel- oped economies suffer from inertia and path dependence, due to their deeply ingrained, even fossilized values, corporate cultures and organizational structures. Emerging market MNCs, on the other hand, particularly those from Asia, have adopted a number of inno- vative organizational forms suited to their needs, including networked and decentral - ized structures. Such flexibility has enabled emerging market MNCs to innovate in novel ways.
Their ability to adapt technology to the typi- cally smaller-scale markets of developing and emerging economies, their cheaper labor and imperfect input markets are all reminiscent of the way that many well-known Latin American MNCs grew during the 1950s and ’60s. Emerging market MNCs are also able to adapt their offer to appeal to a wide range of consumers that traverse borders. Certain “ethnic brands” – Bimbo, of Mexico, is a prime example – appeal not only to consumers in the home market, but also reach out to the Latino diasporas in foreign countries, especially in Spain and the United States. Others exhibit an uncanny ability to take existing products and make incremental im- provements or develop specialized variations for certain market niches. Acer, of Taiwan, or Samsung, of South Korea, built their early reputations in global markets exploiting this advantage. Along similar lines, emerging market MNCs are able to borrow technology from abroad and then reorganize and execute large-scale pro- duction projects more efficiently, in industries as diverse as steel, electronics, automobiles, shipbuilding, infrastructure development and turnkey plant construction. Hyundai, of South Korea, and Cemex, of Mexico, are frequently cited examples, though many other companies from Brazil, Chile and Dubai, among others, have likewise demonstrated a superior ability to borrow technology and organize efficient operations across many markets and indus- tries, including construction, electricity, port operation and telecommunications. n Build vertical and horizontal networks with other firms to enter foreign markets, deepen your knowledge and gain access to competitive resources that the firm lacks.
n use vertical integration t o operate efficiently on a global scale and become the world leader in your industry. n use alliances, joint v entures and acquisitions to expand faster and make up for competitive shortcomings.
n Actively manage relationships with local officials and forge strong relationships with relevant stakeholders in the community. Learning From Emerging Markets these behavior patterns can be adopted by others. exhibit 2 iese insight 18 third Q uA rter 2011 issue 10 The Rise of Emerging Market Multinationals REALIZING EMERGING REALITIESTime to Change Up Traditional, established MNCs have much to learn from their emerging market counterparts (see Exhibit 2). Indeed, many have adopted some of their behavior patterns. Increased competitive pressure from emerging market MNCs – in industries such as cement, steel, electrical appliances, construction, banking and infrastructure – has, for example, prompt - ed many North American and European firms to become much less reliant on traditional prod- uct differentiation strategies and vertically integrated structures. To some extent, the rise of networked organizations and the extensive shift toward outsourcing represent competi- tive responses to the challenges facing estab- lished MNCs. The adoption of more network-based struc - tures and innovative organizational forms requires a special type of manager adept at coordinating these dynamic and accelerated activities. Certain managerial skills become critical, including the ability to manage mergers and acquisitions, as well as strategic alliances, effectively. Managers need to know the ideal or - ganizational combinations that will extract the most value, yield the most learning and grant the most access to vital resources, which will ultimately increase the international competi- tiveness of the firm. They also need to become nimbler and more flexible in order to take full advantage of new technology. They have to think about sources of competitive strength other than technology and brands, especially in the areas of execution and political skills. Today, the diffusion of new technology and know-how happens so fast that those who pio- neer them have only a temporary advantage, making the challenges facing traditional, es- tablished MNCs that much more urgent. First mover advantages are not as sustainable as they once were. Moreover, research has shown that firms The adoption of more network-based structures and innovative organizational forms requires a special type of manager adept at coordinating these dynamic and accelerated activities. n Guillén, M.F. and e . García-Canal. The New Multinationals: Spanish Firms in a Global Context. Cambridge and New York: Cambridge u n iversity Press, 2010.
s p anish translation: Ariel, 2010.
n Guillén, M.F. and e . García-Canal. “ ho w to Conquer New Markets With Old s k ills.” Harvard Business Review 88, no. 11 (2010): 118-22 .
n Guillén, M.F. and e . García-Canal. “ th e American Model of the Multinational Firm and the New Mul - tinationals From e m erging e c onomies.” Academy of Management Perspectives 23, no. 2. (2009):
23-35. TO KNO w MORE from developing and emerging countries face lower hurdles when it comes to adopting new technology than their more established coun - terparts in developed countries. This makes them even more formidable competitors. We’re at a watershed moment. The con- tinued growth of emerging economies will go hand in hand with the rise of emerging mar - ket MNCs. While we should not expect all of them to be successful, we will surely see more of them rising in the rankings of the world’s largest firms. iese insight 19 issue 10 third Q u A rter 2011